On October 18, 2023, the General Court of the European Union issued a judgement wherein it went on to reject the appeal made by Teva and Cephalon against the European Commission’s decision from 2020. It is well to be noted that the decision-imposed fines of near about €30 million on each company for their role in an anti-competitive patent settlement deal that took place in 2005.
The case can be seen as a historic relic when it comes to certain aspects. Ever since the US Supreme Court’s Actavis ruling in 2013 and the subsequent decision by the Commission in Lundbeck, it has become evident that any kind of value transfer right from a patent holder to a generic entrant that has the potential in order to settle a patent dispute will be effectively and watchfully examined and met with regulatory scepticism. This scrutiny is especially focused on instances where the value transfer surpasses reasonable compensation when it comes to legal costs.
In 2015, Teva, which had acquired Cephalon in 2012, made a prominent settlement with the FTC. As part of this settlement, Teva agreed to give $1.2 billion to provide compensation to buyers who had paid more than was necessary due to settlements with 4 generic manufacturers across the US. These agreements involved $300 million in payments in the case of API supply and IP licences, which were found to lack financial justification and were essentially made to deter marketing for up to 6 years. Apparently, any remaining funds were intended to be allocated to the US Treasury. As part of the settlement, Teva was forbidden from engaging in the same kind of business agreements within 30 days of, or that were specifically dependent on, a patent litigation settlement that limited the introduction of generic products.
However, this restriction did not affect Teva’s capacity to enter into other types of agreements that were unlikely to raise antitrust concerns. For instance, Teva could still enter into settlements that engaged payment for future litigation costs, up to a maximum of $7 million.
It is well to be noted that the recent EU judgement does not introduce any new concepts, but it provides an important reminder of what one must be cautious of. It highlights the significance of adequately documenting valid reasons for participating in litigation regarding patents or engaging in commercial deals with potential generic competitors in the future.
The compound patents for modafinil, which is the API in Cephalon’s sleep disorder drug Provigil, expired in 2003. Cephalon made use of secondary patents, which were valid until 2015, to take part in legal disputes against several generic companies looking for marketing authorizations across Europe.
In 2005, Teva introduced its generic product in the UK. During the proceedings for interim relief, a settlement was reached where Teva agreed to suspend sales. In return, Cephalon would post a bond to reimburse Teva if Teva were to succeed in the main proceedings. Afterwards, the parties came to an agreement that contained non-compete and non-challenge restrictions.
As part of this agreement, Teva agreed not to go into the market until 2012, which was 3 years before the patent was set to expire. As part of the agreement, Teva took multiple steps. They licenced Cephalon’s intellectual property rights, agreed to offer Cephalon with their API, and became the exclusive distributor for Cephalon in the UK. Teva also received payments from Cephalon to cover the costs of avoiding lawsuits. Additionally, Teva obtained a separate licence for specific data that was co-developed by Cephalon during research studies that concerned the treatment of Parkinson’s disease.
Restriction of Competition by Object
The parties offered arguments stating that each business aspect of the settlement package had a reasonable rationale that did not involve market-sharing. They also argued that Teva’s initial entry into the market was beneficial for rivals. They argued that the Commission incorrectly applied the two-part test established in the 2020 Generics UK ruling, which was an appeal against the UK paroxetine ruling. In this scenario, the European Court of Justice determined that a settlement that involves transfers of value is considered a hardcore restriction of competition by object if two conditions are met.
Firstly, the value transfer must have no other explanation than the parties’ business motives to avoid competing on fair terms. Secondly, the agreement must lack demonstrated pro-competitive effects that would cast doubt on whether the settlement causes significant harm. The decision also clarified that there is no requirement for the net gain from the transfer to be greater than the possible earnings of generic newcomers if they had succeeded in the patent litigation hearings.
- The only explanation for the value transfer is an agreement not to compete based on merit
The Commission must determine if the settlement package would have been agreed upon under the same favourable circumstances without the inclusion of the non-compete as well as non-challenge clauses. If the answer is negative, it can be determined that the only justifiable explanation is that the commercial arrangements were merely meant to discourage the potential generic entrant from going into the market. This would imply a restriction on competition by object.
The General Court reaffirmed the ruling in Generics, stating that the Commission may only consider legal and economic factors that were known to the parties at the point of the settlement. Interestingly, any factors that arise after the settlement cannot be taken into account.
The Court carefully reviewed the Commission’s evaluation of each component of the settlement package-
- The evidence went on to indicate that Cephalon did not perceive Teva’s patents as a main threat and did not conduct any in-depth evaluation of their worth before agreeing to pay $125 million for a non-exclusive licence. This licence ultimately proved to be of little, or rather no, value to Cephalon.
- The API supply agreement included a guarantee from Teva for minimum volumes with a 30% margin for five years. The Commission considered this arrangement to be unreasonable financially, except in the context of the settlement. Cephalon did not face any long-term supply issues and had the capability to fulfil the sought-after demand. The prices paid to Teva were substantially greater, ranging from 100% to 300%, apparently more than the prices paid to a different third-party supplier and Cephalon’s internal transfer price. Therefore, the Commission had the right to consider the supply deal as an attempt to persuade Teva from entering the market.
- Teva received a one-time payment of €2.5 million and also a guaranteed annual distribution margin of 20% worth €8 million through the UK distribution appointment. The Court acknowledged that these benefits would not have been possible in typical market circumstances.
- Cephalon made a payment of €3.07 million to Teva in order to settle the UK litigation. Additionally, they paid €2.5 million so as to prevent any potential patent or other litigation in markets beyond the UK and US. The Commission determined that the amount of €5.57 million was insufficient to cover the exact litigation costs incurred by Teva, and it was not assessed based on a projection of the litigation costs that Cephalon managed to avoid. The amount was determined based on Teva’s projected sales of modafinil in the UK. The Court has ruled that only reimbursement paid for actual litigation or other incurred costs can be considered justified and not regarded as reverse payments. While the possibility of justifying payments for future litigation costs was not completely ruled out, the parties engaged must present proof to support such costs in specific cases.
- The $1 million licence granted by Cephalon to Teva for clinical and safety data related to the treatment of Parkinson’s was considered highly valuable. This grant enabled Teva to expedite the market introduction of its product, Azilect. According to contemporaneous Teva documents, it was indicated that if access to the data was delayed, Teva could have potentially incurred a loss of around 200 million dollars in revenues. Based on this reasoning, the Court determined that the Commission had the right to conclude that the data licence played a role in persuading Teva to agree to the settlement.
The Court determined that the parties had attempted to negotiate a series of transactions that would give Teva enough incentive to refrain from competing, making the settlement package qualify as a restriction of competition by object.
- No demonstrated pro-competitive effects
The Court concurred with the Commission’s assessment that the settlement agreement was not pro-competitive. This was because the agreement granted Teva the opportunity to enter the market three years earlier than if they had not succeeded in the patent infringement proceedings, specifically in relation to Cephalon’s particle size patents.
Restriction of Competition by Effect
The parties contended that the Commission made an error by solely evaluating the potential impact of the agreement on competition without considering the actual effects that had already occurred due to the implementation of the agreements. The assertion was made that the burden rested on the Commission to prove that there would have been an adverse effect on prices, results, creativity, variety, or excellence if the parties had continued to litigate.
Given Teva’s belief that its product did not infringe on Cephalon’s patents and that those patents were invalid, it was reasonable for the Commission to determine that the settlement was not a real evaluation based on the alleged strength of the challenged patents. Instead, it appeared to be a tactic to discourage competition.